The Orange County office market continued to be a leader among its Southern California neighbors and the nation in the first quarter.
The diverse economy coupled with an educated labor pool and deep international trade links continue to attract both new and expanding companies to the region.
But the momentum seen in previous quarters began to show some signs of slowing in the period.
Though the first quarter saw positive absorption, the market recorded a 34% decline from the past quarter, with about 600,000 square feet of net absorption.
About 6% of the roughly 93 million square feet of existing office space in the county is unoccupied, representing a 3% decrease from the previous quarter.
Although vacancy levels continue to fall, recent layoffs among mortgage industry tenants has raised some apprehension.
This is an area of concern among landlords as additional layoffs are anticipated and many mortgage-related tenants occupy large blocks of space.
OC’s competitive office market continues to put upward pressure on rents.
The average asking lease rate has spiked 12% to $2.29 per square foot in the past year. Many businesses are being driven to renew leases or search for improved office space early in order to achieve affordable rents.
Also a contributing factor to higher rents is the moderate pace of construction.
The first quarter saw an increase in construction with more than 415,000 square feet of office space completed.
Developers of commercial office space must deal with a lack of available land and high construction costs. They also face strong competition for available land from residential developers in some cases.
Net Absorption
The start of 2006 saw a slowdown in net absorption, with 600,015 square feet being positively absorbed into the market.
The greater John Wayne Airport area alone accounted for more than 70% of the total net absorption posted in the quarter,a total of 427,902 square feet.
Most of this activity took place in the Irvine Spectrum submarket, which recorded 367,641 square feet of absorbed space.
Absorption of class A space declined in the to 22,453 square feet, while demand for class B space was apparent in the 733,888 square feet of net absorption.
Low-rise office space improved in the quarter with 544,725 square feet of positively absorbed space.
Vacancy
OC vacancy rates fell from 6.2% in the fourth quarter to 6% in the first quarter. Vacancy is down 37% from a year earlier.
Due to the moderate pace of construction and the favorable economy in OC, it’s no surprise that vacancy levels continue to drop.
Central County, which has 16 million square feet of office space, has the highest vacancy rate at 8.2%, while South County ended the quarter with the lowest vacancy rate of 4.2%.
Lease Rates
Average asking lease rates spiked another 13 cents in the first quarter to $2.29 per square foot, almost hitting the $2.30 per square foot mark posted at the start of 2001.
Increased rents across the board were seen in all OC areas in the first quarter.
The largest rise was 21 cents per square foot in the greater airport area. Rents there are $2.49 per square foot.
North County had the smallest rent increase in the quarter, up 3 cents to $1.86 per square foot.
Newport Center remained the most expensive submarket in the county at $3.49 per square foot while the Anaheim Hills submarket became one of the most affordable at $1.64 per square foot.
Construction
Construction was completed on 30 buildings totaling 415,454 square feet in the first quarter, an 9% increase compared to the previous quarter.
New office buildings include 20 small office buildings at the 23-building Brenexus project in Irvine, which added 189,450 square feet to the OC base.
In the first quarter, 2 million square feet of space broke ground, leaving the total square feet under construction at 3.7 million in OC.
Data and analysis by CB Richard Ellis Group Inc.
